The FTX Recovery Trust is taking legal action against Genesis Digital Assets, a cryptocurrency mining firm, seeking $1.15 billion. This move aims to recover funds from what the lawsuit describes as one of the “most ill-advised” investments made by FTX’s former leader, Sam Bankman-Fried.
Bankman-Fried, the one-time crypto industry star, began investing in GDA, a company based in Kazakhstan and distinct from Genesis Global Capital, back in 2021 through Alameda Research, an FTX subsidiary. According to the suit, between October 2021 and April 2022, he channeled $1.15 billion into GDA based on “clear misrepresentations and ignored warning signs.”
In 2021, Kazakhstan experienced a significant increase in cryptocurrency mining operations, which put a strain on the nation’s electricity supply. The lawsuit claims that Bankman-Fried failed to consider the energy challenges in Kazakhstan and instead relied on GDA’s “unaudited financial records [which] were completely detached from reality” when making investment decisions.
Bankman-Fried’s initial investment in GDA was $100 million. Later, after the government of Kazakhstan placed limits on the energy crypto miners could consume to address a growing energy crisis, GDA looked to raise more capital to relocate its operations to the United States. According to court documents, Bankman-Fried then negotiated a substantially larger investment with GDA co-founders Rashit Makhat and Marco Krohn, influenced by what a GDA board member allegedly called an “outlandish and unrealistic” valuation.
Court documents state, “Even with rising energy costs, strict regulations, and a lack of interest from other investors, the diligence process raised numerous red flags, all of which Bankman-Fried disregarded when he acquired GDA shares at an even greater overvaluation. To make matters worse, more than half of the invested funds went directly to Makhat and Krohn personally, allowing them to profit from the struggling company without benefiting GDA itself.”
The lawsuit alleges that Bankman-Fried made these decisions “with misappropriated funds burning a hole in Alameda’s pocket.” His investment in GDA was one of many that contributed to FTX’s liquidity problems and subsequent bankruptcy, ultimately leading to his convictions for fraud.
The FTX Recovery Trust has been actively working to recover investments made by FTX to repay creditors. Creditors, who had their funds locked up for over two years, received approximately $6 billion between February and May of this year. An additional distribution of $1.6 billion is planned for this month.
A representative from GDA, which has recently relocated from Kazakhstan to Dubai, declined to comment on the matter.